According to research by CryptoCompare, published on blockchain news websites, in July 2022, cryptocurrency derivatives trading reached $3.12 trillion, accounting for 69% of total digital assets. From the moment of the appearance of such derivatives, they have aroused great interest among investors. Let’s discuss crypto derivatives and how you can benefit from them.
Some words about crypto derivatives
Crypto derivatives are secondary contracts, the value of which depends on the primary asset, the cryptocurrency.
Crypto products and ordinary derivatives have similar actions since the seller, and the buyer agrees to sell and buy base assets. In most cases, the purchase period and the worth of financial instruments are determined in advance.
A derivative has no internal value; the agreement’s price depends only on the underlying asset’s value. Bitcoin or Ethereum derivatives rely on price fluctuations for these cryptocurrencies.
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The most common kinds of digital assets-based derivatives
Various financial instruments in today’s cryptocurrency market differ in terms of contracts. You must find the best product considering the current market situation. Let’s analyze famous variants of crypto derivatives exchange:
- Crypto futures: these are contracts that allow the parties to agree to exchange an asset at a certain point in time at an indicated price instead of buying it on the spot market. The parties must accept or sell tokens at the specified cost at the agreed time.
- Crypto options: such instruments look like futures; the distinction is that the purchaser can choose not to accept the asset. The buyer must pay a premium, which is canceled if the token price does not suit him for such an instrument to get an income. Thus, the seller will keep the token and receive a premium if the purchaser does not wish to fulfill a commitment.
- Perpetual contracts: these are futures agreements without an expiration moment. For instance, if there is a determined amount of digital assets on the account, it is beneficial for traders to maintain open positions indefinitely.
Today, in some countries, derivatives are considered illegal financial instruments. Thus, if a trader wants to trade them, he must be located in a country where such operations are legal.
Advantages and disadvantages of crypto derivatives
Traders profit significantly from the digital market if they make accurate price predictions. Whether it is an increase or decrease in value, the investor’s judgment determines the profitability of an asset. It is the fundamental principle of how spot markets work. But traders can achieve better results by buying crypto derivatives. Main benefits of digital assets-based products:
- Market performance: derivative trading involves arbitrage, which guarantees market balance and fair prices for base assets.
- Minimal dealing expenses: derivative contracts cut transaction costs as they are designed to manage risk – the price of financial transactions when trading derivatives is less than when interacting with other assets.
- Significant leverage: traders can utilize leverage to grow profits without risking large sums.
The critical downside of derivatives that users face is significant volatility. Prices can rise and fall at breakneck speed, and losses can multiply several times over when an investor trades on margin.
Primary features of derivative trading exchanges
We can meet derivative contracts on centralized and decentralized exchanges. Such platforms are used to find additional investors. It will be helpful for you to learn about the main aspects of crypto derivatives exchange:
- Stop loss and take profit: these pending orders determine the minimum and maximum value of the contracts so that traders can automatically leave the market under the right circumstances.
- Partially closed orders: traders receive a share of the profits from partially closing orders while still benefiting from the rising market.
- Insurance funds: when an asset’s price falls more than the maintenance margin, they let traders avoid automatic deleveraging.
A derivatives exchange is more supple than spot margin trading. Such a platform guarantees access to markets that, under other circumstances, the user would not get.
Secrets of successful trading
There is no universal solution that guarantees profit when trading with cryptocurrencies. But some rules will help you to protect your savings.
When choosing a financial instrument, it is critical to analyze the price trend. When dealing with a bull market, it is better to select an option. As for the bear market, the preferred choice here is the future. In a chaotic market, you should look towards perpetual contracts.
Another important aspect is the choice of a secure platform for operations with cryptocurrency derivatives. It would help if you found a trusted exchange with a vast trading volume, positive reviews, and security measures to combat scammers.
Crypto derivatives are a secure tool for managing risks caused by the significant volatility of digital assets. Previously, we witnessed a sharp change in the value of crypto coins, which made crypto exchanges vulnerable institutions, and many traders hesitated to invest in such quasi-money. Crypto derivatives exchange provides hedging of underlying decentralized money and reduces risks by predicting and betting on the market prices of digital coins.